Merger and Acquisition Financing Options
The primary goal of a company is growth and its top management is always on a lookout for ways to achieve that. Merger and acquisitions are one of those ways to set the juggernaut of growth rolling. The key principle behind any Merger and Acquisitions is to enhance shareholder value. The reason why CEOs favor Merger and acquisitions is that they believe that the value of the two companies together is greater than separate companies. The force that drives a Merger and acquisitions is “Synergy” or potential financial benefits that can be reaped by a merger or acquisition. Whenever a merger or acquisition is proposed, a synergy potential is calculated. If the merger or acquisition is expected to create greater efficiency and scale, the result is referred to as synergy merge. A merger or acquisition is always aimed at enhancing revenues and increasing the visibility of the industry.
Understanding Mergers and Acquisition
Mergers can be categorized depending upon the business. There are mainly three kinds of mergers listed below:
- Horizontal Mergers: When companies to get merged are in direct competition i.e. they have same product line.
- Vertical Mergers: Both companies are each otherâ€™s customer or suppliers.
- Conglomeration: There is no common business between the companies.
There is no guarantee that a merger or acquisition will always be successful. Wrong assessments, relaxations, policy clashes, etc. can be just some of the reasons why such a business arrangement might fail. Whether a merger is successful or not, is measured by the increase in the value of the buyer.
Financing Options for Mergers and Acquisition
There are primarily three ways in which someone can accrue the money that is needed to successfully complete a merger or acquisition.
- Through Debt Capital: You can pursue a loan from any creditor who is willing to lend you money against debt free assets that you own. The terms of the loan, like payment period and interest rates can vary from one creditor to another. An advantage of opting to raise funds using this method is that your creditors do not stake any claim in your company.
- Through Equity Capital: You can sell off a small portion of the equity that you own in your company to raise the funds that are needed to successfully complete a merger or acquisition process. This method is commonly opted by family owned businesses where a lot of equity in the company is owned by a single person. Private equity groups are known to offer financial aid in return of equity, and you can contact a PEG that invests in your field.
- Through convertible debt: This option is usually used when other options are not available. Companies that are considered high risk and are unable to secure credit through equity debt or loan debt can opt for raising funds through convertible debt instead. The creditor will loan you the money in exchange of a combination of debt free assets and equity in your company, and the finer details of this kind of financing vary from one deal to another.